Q&A: Mexico also reforming its power sector

Gustavo Madero says of Mexico's electricity reform: "It could be the most important change of all." Mu oz, president of Mexico's National Action Party (abbreviated as PAN for Spanish Partido Acci n Nacional), speaks at the Mayer Brown law firm's Mexico Energy Reform Breakfast Seminar on Jan. 21, 2014, at the Four Seasons Hotel in Houston.

Photo: Emily Pickrell

Gustavo Madero, president of Mexico's opposition National Action Party, helped push his organization to join with the ruling Institutional Revolutionary Party in approving a significant overhaul of Mexican energy policy. The constitutional amendment and related legislation still in the works will open Mexico's nationalized oil sector to more international investment for the first time in decades. During a visit to Houston last week, he spoke with the Chronicle about how the changes will affect Mexico's national oil company, Petroleos Mexicanos, or Pemex, and other aspects of the nation's energy landscape. Edited excerpts:

Q: Mexico is now at the point of developing the laws and regulations to implement its energy reform. Which are the most important to the reform's success?

A: Several laws will be key. One of the biggest considerations that these regulations take on is the fiscal climate. Today, 30 percent of the public income comes from Pemex, so the way Pemex is reformed will be one of the main issues.

Another concern involves the additional regulatory agencies that are going to be developed to oversee the energy industry. They need to be well designed - strong and autonomous - to handle all the changes that are proposed.

There is also the challenge of adapting the new regulations to the new structure of Pemex.

Q: What do you see as the main challenge of restructuring Pemex?

A: There are two - the unions and the government. Both contain elements that have their own interests to protect, and these interests will be affected by the reform. Both could provide resistance that could slow down the pace of the reform or possibly block it.

Q: Gasoline is subsidized so heavily in Mexico that it sells for less than it costs to produce. In order to attract downstream investment, refineries would have to be able to make money. How will the reform affect gasoline prices?

A: This whole situation clearly needs to change. Mexico is not going to be able to maintain such high subsidies. The rationale behind these subsidies has always been that they are helping the poor, but the truth is that they are supporting those who already have money - the middle class and upper class. Because of these kinds of subsidies, there isn't the money to help the poor.

Q: There has been a lot of discussion about how the energy reform will affect the oil sector. But it also will usher in profound changes to the electricity grid, and there doesn't seem to be much of a road map for what this will look like. What are your predictions?

A: You're right. Everyone is talking about oil and gas, and no one is talking about our electricity market, which is going to be opened up completely to the private sector for the first time. It could be the most important change of all. We are going to separate out the transmission from the generation. There is already a lot of private investment in generation in Mexico, but there are controls on how it can be sold to the Mexican grid and under what terms, and this is all overseen by the Federal Electricity Commission. Because they own the generation and the transmission, it has been difficult for private investment, but this will change.

Q: How do you see the security issues in Mexico affecting investment from the United States, and Texas in particular?

A: The drug cartels are well established in states including Michoacan and Tamaulipas. I'm convinced that we will succeed in improving the security of these areas, but it is going to take time. It will also require more coordination, better preparation on the part of the police. It won't happen overnight, but these things occur in cycles, in my view, and we are in the downturn of this cycle right now. Security issues are not increasing, and things are getting better, bit by bit.

Q: How do you think the energy overhaul will change the relationship between the United States and Mexico?

A: Electricity prices, for example, are twice what they are in the United States. We hope that the reform will bring changes that cause these prices to fall, and that lower prices will encourage a range of manufacturing and industrial companies to begin operating in Mexico. This will increase our competitiveness and our economic importance.

She used to be on the energy desk for the Houston Chronicle, covering a range of issues from BP's Deepwater litigation to electricity pricing to Chesapeake Energy's tumultuous finances. Emily previously covered the Financial Accounting Standards Board for Thomson Reuters and water finance for Global Water Intelligence. She has worked as a policy analyst for the Government Accountability Office and as a humanitarian auditor for CARE, where she travelled to Bosnia, Haiti, Mozambique and other far flung locations.

In her free time, Emily writes and plays music, and is still secretly hoping that her jazz rendition of "Living Life Post-Subprime" will one day top the charts.